The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly—cross-border flows of burgers won’t align their prices internationally.

So in 2013 we created our own index which better meets the condition that the product can flow quickly and cheaply across borders: the Geo-Graphics iPad mini Index, which we hereby rechristen the “Little Mac Index.” (H/T: Guy de Jonquieres)

Consistent with our product, iPad minis, being far more tradable than The Economist’s product, Big Macs, our index shows that the law of one price holds much better than theirs does. The average overvaluation of the dollar according to the Big Mac Index was 19% in January - a Whopper. The average dollar overvaluation according to the Little Mac Index was a mere 5% - small fries.